Following on from the recent multi-agency declaration that financial firms need not feel pressure to fall in line with vague statements of preference that emanate from financial regulators, Congressman Blaine Luetkemeyer has tabled a Bill in the House of Representatives to require federal regulatory agencies to proclaim that the 'guidance documents' that they issue are not legally binding.

The Bill is intended to oblige the head of each finanial services regulatory agency to include a "guidance clarity statement" in any document that he issues that advises the public about the agency’s interpretation of a statute or regulation, or tells the public how he intends to exercise discretionary power, if the agency has not issued that document in accordance with the rule-making process set forth in s553, Title 5 USC.

The aforementioned statement is to be displayed prominently on the first page of the document and ought to say: "This document has not been issued in accordance with the rule-making process set forth in section 553 of Title 5 United States Code, and therefore it is not legally binding. Noncompliance with any standard, expectation, or requirement described in this document does not definitively establish the violation of a statute or regulation."

Luetkemeyer (Republican, Missouri) used to be a bank examiner himself and sits on the House Financial Services Committee. By way of explanation for his Bill, he wrote on his website: "Regrettably, over the last few years there has been a hazy distinction between guidance and rule. Across the federal bureaucracy, the application of guidance has been abused through so-called ‘regulation by enforcement.’ Our government prides itself on a transparent system of checks and balances, yet many agencies have used guidance in lieu of following the established rulemaking process to regulate industries. My Bill will address the vast uncertainty surrounding the unique role of guidance in all federal agencies. Guidance documents are intended to clarify an agency’s policy or interpretation of a regulation but do not carry the weight of finalized rule or law. The official rulemaking process includes numerous steps that must be taken before final enactment. These steps can include public notice and comment, submission to Congress pursuant to the Congressional Review Act, and additional provisions to ensure the input of all stakeholders is included in the formation of a rule. Guidance documents skip over many of these checks and balances and can be published without review or comment."

Operation Choke Point

Luetkemeyer has already had some success in combating this worrying trend. Last month the House of Representatives (although not, as of 15 December, the Senate) passed a Bill of his to bring a formal end to the federal probe known as Operation Choke Point, which under the Obama administration tried to force banks to blackball customers from various sectors of legitimate business that President Obama did not like. These included porno film retailers, payday lenders, sweepstakes, magazine subscriptions, sellers of firearms, topless bars, coin dealers, pharmaceutical sales, marriage bureaux, tobacconists and a host of others. Court documents released in September showed that top government officials involved in the operation had been struggling to find a legal basis on which to persuade banks to cease trading with businesses that had not committed any crimes. A payday lender called Advance America's case against the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency led the judge to release the documents, which revealed that the firm was struggling to remain in the payday lending business, having received 'termination notices' from 21 banks.

The House of Representatives' Committee for Oversight and Government Reform issued a report in 2014 in which it said that the US Department of Justice began the operation with the aim of "choking out” companies that Obama considered a “high risk” or otherwise objectionable, despite the fact that they were legal. The goal was to deny these merchants access to the banking and payments networks that every business needs to survive. The operation forced banks to end their relationships with many businesses, with the Government making the specious claim that the provision of normal banking services to certain merchants created a “reputational risk” sufficient to trigger off federal investigations. Bank regulators then helpfully labelled a wide range of lawful merchants as “high-risk.” The report concluded that the DoJ and the regulators were going ultra vires, conducting their pressure campaigns in secret with the aim of making life intolerably difficult for Obama's least favourite businesses. When banks ceased trading with their customers they often did so en masse and with few or no warnings or explanations. Court documents state that one regulator, the FDIC, threatened some bankers with criminal prosecution if they persisted in banking payday lenders. Once the bankers had acceded to its pressure, it commanded them to pretend that they were taking voluntary action against those lenders.

A press release from Darrell Issa, the House Oversight Committee Republican Chairman at the time, said, “Operation Choke Point is the Justice Department’s newest abuse of power. If the administration believes some businesses should be out of business, they should prosecute them before a judge and jury. By forcibly conscripting banks to do their bidding, the Justice Department has avoided any review and any check on their power.” President Trump wound the operation down to a large extent last year, but the judge in the Advance America case heard that it had left behind a culture of fear at banks, which were still avoiding business with the blackballed entities and indeed were blackballing fresh ones.

Many find it worrying that Obama's campaign has set a precedent for future quasi-regulatory operations of this type. In the private client management world, it is possible that the US Government might one day direct its efforts against businesses that are of use to HNW individuals, such as gold custodians, protected cell companies, safe deposit businesses and certain kinds of company formation agent, not to mention HNWs with overseas assets themselves. The Luetkemeyer initiative is an attempt to end the era of such operations once and for all.

When Luetkemeyer won his legislative victory, he said: "The federal government should not be able to intimidate financial institutions into dropping entire sectors of the economy as customers, based not on risk or evidence of wrongdoing, but purely on personal and political motivations."

The recent, if grudging, federal multi-agency declaration from which Luetkemeyer's Bill springs is discussed here.